> Crossgain vs. Microsoft: 'Mooning the Giant'
> The startup found Bill Gates & Co. still gives no quarter
>
> It's a short trip between love and hate. Just ask Tod Nielsen. A year
> ago, he was a trusted employee at Microsoft Corp. (MSFT) Chairman
> William H. Gates III had such faith in the young vice-president that he
> pulled him aside and asked him to go to Washington, D.C., to be his eyes
> and ears at the landmark antitrust trial. There, even in the face of
> mounting evidence of anticompetitive behavior, Nielsen insisted that
> Microsoft was not the bully the government portrayed. These days, Gates
> and Nielsen talk only through lawyers, and Nielsen knows firsthand about
> Microsoft's strong-arm tactics.
>
> It all started last fall when Nielsen, who had left Microsoft, became
> CEO of Crossgain Corp., a business launched by Microsoft alumnae in
> February, 2000. The startup's aim: to create a service that runs a
> company's big software programs over the Web. Despite Crossgain's roots,
> its top execs chose to develop their service using products from
> Microsoft rivals Sun Microsystems Inc. (SUNW) and Oracle Corp. (ORCL)
> That was one in a series of decisions that snubbed the software
> giant. By Jan. 15, Crossgain's employees were in Microsoft's crosshairs,
> accused of violating noncompete restrictions contained in their
> employment agreements with Microsoft. Nielsen and 22 of his compadres
> felt they had little choice but to fire themselves--wiping out 28% of
> Crossgain's workforce. They plan to trickle back to Crossgain when their
> yearlong noncompete restrictions expire.
>
> How did it come to this? Crossgain officials decline to comment.
> Microsoft insists it was just sticking by its rights. ''We felt like we
> had good-faith discussions with Crossgain to resolve the conflicts in
> the noncompete agreements. We find it both surprising and regrettable
> that Crossgain abandoned those discussions,'' says a spokesperson.
> Inside sources at both companies, however, say that Microsoft tried to
> use the issue in an attempt to force Crossgain to build its service on
> Microsoft software. This tale, pieced together from two dozen interviews
> with execs at both companies and outsiders who declined to be
> identified, shows that even while Microsoft is under the microscope of
> its antitrust case, it's willing to go to great lengths to muscle an
> adversary. The fact that Crossgain's founders were prodigal sons didn't
> help them one iota.
>
> KEY PLAYER. For Nielsen, the decision to leave Microsoft after 12
> years--most recently as head of developer relations--had been
> excruciating. He broke down and cried last June when he told Microsoft
> President Steven A. Ballmer that he needed a break from work. In
> September, he joined Crossgain because he saw it as a key player in the
> next generation of Internet computing.
>
> There's a saying in techdom about Microsoft: Don't moon the giant.
> Crossgain mooned Microsoft every which way. First, the ex-Microsofties
> poached some of their former colleagues to join them at the startup.
> Then they raised $10 million from investors, including The Barksdale
> Group, a venture firm run by Microsoft's chief nemesis at the antitrust
> trial, former Netscape Communications Corp. (AOL) CEO James Barksdale. A
> few months later, Crossgain named Mitchell Kertzman, an outspoken critic
> of Microsoft's business practices, a director. Kertzman is CEO of
> Liberate Technologies (LBRT), an interactive-TV software maker that
> competes fiercely with Microsoft interactive-TV technology.
>
> The last straw was Crossgain's decision to base its technology on
> non-Microsoft software. Instead of using such Microsoft products as the
> Windows 2000 operating system and SQL Server 2000 database package to
> develop its service, Crossgain opted for software made by rivals. ''It
> doesn't look very good for Microsoft if a company run by its former
> vice-president of developer relations is using software made by
> Oracle,'' says a former Microsoft executive.
>
> At first it seemed like war could be avoided. Last September, Nielsen
> heard from Senior Vice-President Paul Flessner, who runs Microsoft's SQL
> Server database-software business. Flessner and Nielsen were frequent
> lunch partners during Nielsen's days in Redmond. So when Flessner said
> he was concerned that Crossgain was in contact with Microsoft customers,
> Nielsen hopped in his Ford Explorer and drove a mile up the road to meet
> Flessner in his office. He laid out Crossgain's business plans, arguing
> that Microsoft had nothing to fear from the nascent company.
>
> Weeks went by. A few days before Thanksgiving, Flessner, via e-mail,
> accused Crossgain of competing directly with Microsoft. And he alleged
> that the staffers Crossgain hired from Microsoft had violated their
> Microsoft employment agreements. Nielsen, Crossgain founders Adam
> Bosworth and Rod Chavez, and other ex-Microsofties were dumbfounded.
> They couldn't understand how they competed, since Microsoft didn't have
> a service to run software applications over the Web. And they couldn't
> fathom how Microsoft, a company they worked so hard for, could be so
> punitive.
>
> The fight got messier. Nielsen and Flessner met three more times in
> Redmond in December. Nielsen was accompanied by Bosworth and company
> lawyers. Flessner matched him, flanked by Microsoft attorneys. Flessner
> said that Crossgain competed because its technology would allow users to
> exchange data over the Internet. To Crossgain, that definition of
> competition was overly broad. And some legal experts agree. ''Courts
> aren't going to expand the circle of competition beyond real serious
> competition,'' says Peter M. Panken, an employment law specialist at
> Epstein, Becker & Green in New York.
>
> With a potential lawsuit looming, Microsoft offered a deal, according to
> Crossgain and Microsoft. If Crossgain committed to building its service
> with Microsoft products, the company wouldn't pursue the noncompete
> claims. Crossgain sources say Microsoft specifically wanted to preclude
> the company from using Oracle database software. Microsoft sources deny
> that. Switching to Microsoft technologies meant huge delays and the loss
> of months of work for Crossgain, which hopes to launch its first service
> in March. But the deal also meant avoiding months, or perhaps years, of
> litigation with one of the wealthiest companies in the world. Crossgain
> execs thought they could win the litigation, but the time and expense to
> do it would be a huge drain.
>
> As the negotiations continued, Crossgain enlisted a handful of former
> Microsoft executives to help make their case with Ballmer and other big
> brass. But Microsoft didn't back down. ''Steve [Ballmer] takes a strong
> point of view. He feels people who sign employment agreements should
> live up to them,'' says an exec familiar with the talks.
>
> ''CHARGED UP.'' So Crossgain considered the offer. The company entered
> into a three-week agreement with Microsoft, beginning Jan. 1, in which
> it would test Microsoft's software. After two weeks, though, Crossgain
> concluded that it would be more trouble than it was worth. Crossgain
> execs believed that by firing the 23 employees, they could remove
> Microsoft's most potent argument if it sues. Crossgain decided that the
> right to choose its software was worth the fight. ''The Crossgain guys
> were saying, 'Give me liberty or give me death,''' says an executive.
>
> They got purgatory. At a meeting of the company's 80 employees, Nielsen
> told the staff about a section in James C. Collins' business management
> book Built to Last: Successful Habits of Visionary Companies. Every
> successful company, Collins writes, has to overcome a challenging
> episode early in its life. This, said Nielsen, was Crossgain's episode.
> ''The remaining folks were charged up,'' says one worker. Nielsen,
> Bosworth, and the other Microsoft alums cleaned out their desks, handed
> off their tasks, and walked out the door.
>
> What happens next is unclear. Bosworth can return to Crossgain next
> month. Nielsen can come back in July. With more than a quarter of its
> workforce gone, though, Crossgain is likely to lose valuable time
> getting its product to market. Meanwhile, Microsoft could still sue,
> claiming that Crossgain's technology is based on the work of former
> Microsoft employees who violated noncompete agreements. Microsoft won't
> disclose its plans.
>
> One thing is certain: Anyone who thought the software giant mellowed
> with the antitrust trial should think again. Since the antitrust case
> began, Microsoft has gone to great lengths to shed its image as a
> corporate bully. But as the Crossgain struggle shows, hardball is part
> of Microsoft's DNA.
>
> By Jay Greene in Seattle